Relaxo Footwear's stock gained 75% in six months, thanks to drop in rubber price

Relaxo Footwear's stock has gained 75% in last six months, thanks to the drop in the rubber price- which is the key raw material for the company. The company's earnings were significantly impacted in the previous year due to the high rubber price.

Sudden rise in the rubber prices last year led to rise in working capital requirement for inventory. Also the company could not pass on the entire cost to the customers. This impacted the company's return on equity in two ways. Firstly higher capital was blocked in working capital and the profit margins also declined. Operating profit margin of the company dropped to 10.5% and 11% in FY11 and FY12 respectively as compared to 14.6% in FY10. However, the recent correction in the rubber price has helped the company to restore its operating margin to 13-14% in the last two quarters.
Also the company's has increased it advertising and branding activities. It recently signed up with Salman Khan, Akshay Kumar and Katrina Kaif for celebrity endorsement. This will help the company improve its brand visibility and shield it from any future cost increases by allowing it to pass it to the consumers.

Outlook for the company appears bright. Its profit after tax in the June 2012 quarter was Rs 15 crore, annualizing this means the company will make a profit of Rs 60 crore in the current fiscal. At the current market price of Rs 555, the company is trading at FY13E price to earning multiple of 9.3 which is at a significant discount to its bigger peer Bata India which is trading at FY13 P/E of 22.

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